Cloudy forecast for credit union auto lending in 2020
Despite total annual sales topping 17 million for more the last several years, auto lending across the country is on the decline, meaning a key credit union revenue driver is slowing down too.
Last year saw a 1.6% year-over-year decline in total auto sales, according to automotive research firm Edmunds, and credit union growth in that sector slowed significantly. The latest Credit Union Trends Report from CUNA Mutual Group shows year-over-year growth stood at just 2.7% as of November, the most recent data available, down precipitously from 10.5% in November 2018 and 11.6% year-over-year in November 2017.
The slowdown is expected to continue into 2020 and beyond. The National Automobile Dealers Association is predicting new auto sales of 16.8 million for 2020, a 1.2% drop from 2019 sales volumes, while Cox Automotive forecasts a 1.5% tumble for the used car side. Growth in new auto loans was flat for credit unions as of November, a stark change from double-digit year-over-year growth during each of the previous two years. Used car figures were still up by 4.5% at CUs, but that’s less than half of where growth rates stood in November 2018.
“The peak of auto transactions for this current expansion that we're in economically is in rearview mirror now,” said Matt Lyons, chief lending officer of USE Credit Union in Berkeley, Calif. “Now it's gradually declining until a correction and another expansion.”
Still, used car sales are expected to remain strong for credit unions, with 20.3 million units expected to be sold nationwide this year, or growth of about 1.5%. That’s good news for CUs, said Bill Meyer, public relations and content manager at CU Direct.
"Credit unions have a very strong presence in used car marketplace, where captives and banks are less proactive." Meyer said. "We're looking at approximately 60% used car versus 40% new car lending. With the strong used car sales projection, credit unions have an opportunity to perform well on the finance side.”
Market share shrinking
The industry must also worry about decreasing market share. At the close of Q3, credit unions had 19.5% market share for new and used auto lending, down from 22.6% in Q3 2018, according to Experian.
Bob Child, COO at CU Direct, suggested that drop is partly due to credit unions pulling back on auto lending amid fears about a potential recession and rising delinquencies. Other lenders, including Capital One, have suggested falling prices on used cars could pose major risks for auto lenders. Still, credit unions continue to hold more than 28% of the market for used cars, a drop of just 1 point from Q3 ’18, while new car market share fell nearly 3 points to 11.7%.
“We surveyed about 20 of the largest credit union auto lenders in the United States to find out what their growth predictions would be for auto lending in 2020,” said Child. “Fifty-seven percent of the credit unions we surveyed said that they would be flat in 2020 or slightly down compared to 2019.”
With all that in mind, many CUs are being cautious about auto lending as 2020 gets underway, and some have pulled away from indirect lending, where growth is slowing. Year-over-year growth in indirect loan balances stood at 15.5% as of Q3 last year, down 3.8 points from the same period the year before, according to Callahan & Associates.
Credit unions will also have to deal with shifting consumer expectations surrounding auto lending. While five-year terms were long the norm, Experian reports that nearly 31% of new auto loan terms were from 61 to 72 months as of !3, while 19% of used car loans now range from 73 to 84 months.
Child said some credit unions have extended loan terms to help members keep payments low but increasing competition between banks and CUs will likely prevent current term limits from stretching any further.
“In 2019, banks have jumped up significantly on their used car duration, and now they are almost at the same length as credit unions,” Child said. “I don't see that credit unions will keep increasing their duration. Those numbers will either remain where they're at or come down slightly.”
Instead of lengthening loan terms, lenders can find creative ways to shorten terms and trade cycle, whether by adopting lease options with granular terms that match consumers’ buying and driving habits, or trying subscription-based models where a customer pays a flat monthly fee for the use of one or more vehicles, said Brien Joyce, VP of EFG Companies.
Credit unions can also tap into consumer protection products to stay competitive and drive volumes. For instance, half of the consumers who purchase a vehicle at a dealership also buy extended mechanical coverage, and the dealership’s profit is between $1300 to $1,400, he said.
“Credit unions only mark those products up $300 or $400, but their penetration is only 8%,” he said. “In my opinion, this is a great opportunity for credit unions to protect consumers with some reasonably priced products and generate additional income.”